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Corporate Close-Up: $300 Million in Income Means Economic Presents for Oregon

Is it possible to owe state corporate income tax without
having any offices, employees, or property there? Yes, if you make enough
profit from customers located in the state, according
to the Oregon Tax Court. Thirty-four
other states currently apply an economic presence nexus test to determine
liability for state income and franchise taxes. In this case, the amount of
income was paramount in the Court’s decision. It was enough for Oregon to get some presents in the form of tax revenue.

In Capital One Auto Finance Inc. v. Oregon Dept.
of Rev., Oregon announced that two banks in the Capital One Financial
Corporation had established economic nexus for purposes of the state excise and
income taxes when they “extended credit, loaned money, pursued collection and
earned revenue” in Oregon from 2006 to 2008. Neither bank has any real
or tangible property, offices or employees in Oregon.

“In Capital One, the Tax Court applied a common-sense
test in an area that generally is gray,” said Robert Manicke, Partner at Stoel
Rives, LLP, and co-author of the Bloomberg
BNA Oregon Corporate Income Tax Navigator. “The Tax Court’s opinion
suggests that a taxpayer that regularly and systematically derives substantial
revenue from Oregon customers will find it very difficult to prove lack of
nexus.”

How much is enough for Oregon income tax nexus? Here are the
statistics that the Court cited
in its decision that the two Capital One banks had nexus for the years in
question:

24,600,000: number of solicitations the two
banks sent into Oregon for the purpose of obtaining and retaining customers

1,031,000: number of the two banks’ customers in
Oregon

$300 million: amount the two banks charged Oregon
customers in fees

21,397: number of collection lawsuits initiated
by or for the banks in Oregon when Oregon customers failed to pay said fees or
balances due

Manicke continued, “While the Court stopped just short of
deciding whether physical presence is required for a taxpayer to be engaged in
business or subject to the corporation excise tax, the court emphasized that
the sheer number of solicitations and transactions, along with the amount of
fees earned, made it easy to decide that the taxpayer was subject to both the
excise tax and the income tax even without a physical presence in
Oregon.”

In holding
that “substantial economic benefit” is enough to impose excise and income taxes,
the Tax Court stated, “[t]he corporate excise tax and corporate income tax
regimes operate as one cohesive tax scheme. Between the two taxes, Oregon taxes
the income from economic activities in Oregon. Taxpayer earned income from
economic activities in Oregon. Such taxation is permissible without violating
the Commerce Clause if there is also substantial nexus with the taxpayer.
Substantial nexus can be established by economic presence alone.”

“The court’s decision is reminiscent of Justice Scalia’s remark in Wrigley*
to the effect that ‘several thousand dollars per year… is a lot of chewing
gum,’” Manicke told Bloomberg BNA. Watch this space for updates on the fate of
physical presence nexus for state corporate income taxes.

* Wisconsin DOR v. William Wrigley Co., 505 US
214 (1992).

Continue the discussion on Bloomberg BNA’s State Tax Group
on LinkedIn: Should banks be required to have a physical presence in a
state to create substantial nexus under the Commerce Clause and therefore be
subject to state tax?

Get a free trial to Premier
State Tax Library, a comprehensive research service that
delivers deep, unique analysis and time-saving practice tools to help
practitioners make well-informed decisions.

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